The Confidentiality Clause – The Abuse That Keeps on Giving

The First Amendment guarantees us the right to free speech, but unfortunately, it is generally legal to force employees (or anyone else) to sign this away. Businesses do this by making people sign confidentiality clauses to get hired, to keep their jobs, or to get their settlement after any employment dispute or lawsuit. Confidentiality agreements prevent the Employee from talking about anything the Company doesn’t want discussed, and always include the amount of the settlement. Confidentiality will usually be accompanied by its evil twin, “Non-Disparagement.” A non-disparagement clause takes away the Employee’s right to say anything bad about the Company, whether it is true or not. These clauses are sometimes called “Non-Disclosure Agreements”, but no matter what lawyers call them, they are best described as “Gag Clauses”. While the First Amendment still gives you the right to say anything you want, it does not prevent you from being sued if you violate an agreement you signed.

What’s So Bad About These Agreements? Shouldn’t Business Owners Have a Right to Some Privacy?

Businesses legitimately need non-disclosure agreements to protect their trade secrets and other vital information from their competition. Unfortunately, they can also be used to conceal systemic violations of laws and regulations, patterns of discriminatory conduct, or sexual harassment. In those situations, offensive and illegal behavior can continue and flourish. For example, Fox News used these clauses as a curtain to keep a culture of sexual harassment out of public view for over a decade, allowing Roger Ailes to rack up $45 Million in payouts for sexual harassment claims, and Bill O’Reilly another $13M. Because his victims had to sign confidentiality and non-disparagement clauses as part of their settlements, Ailes continued victimizing women in complete privacy. Ailes was probably able to remove many panties off that would otherwise have stayed on if these clauses were illegal. But for the most part, they are perfectly legal under federal law[1], and with a Republican Congress and President Trump in the White House, this will not change anytime soon.

In fact, President Trump loves these clauses so much that everyone who volunteered for his campaign had to sign one prohibiting them from saying anything bad about Trump, his family or his businesses forever, and it also required the volunteers to prevent their employees (if they had them) from doing so. It also prohibited them from campaigning for any other presidential candidate until 2024, even if Trump had had not gotten the nomination. https://arstechnica.com/tech-policy/2016/03/revealed-the-trump-campaign-nda-that-volunteers-must-sign/. While I like to think that the Courts would not uphold something this outrageous because it places an unnecessary restriction on political speech, the President has sued many people without having a good reason, and whether he’s ultimately going to win or not, who wants to be the one to find out?

Is This Problem Limited to the Employment Context?

No. For many years, the Catholic Church settled claims brought against pedophile priests using these same exact clauses, and it still does. The Diocese would transfer the pedophile priest to another distant parish, the family would sign a confidentiality and non-disparagement clause as part of the settlement, and the priest continued to prey upon different children while the risk remained hidden from their parents.

What Happens When You Break a Confidentiality or Non-Disparagement Agreement (“NDA”)?

You can be sued by the Company. When this happens, the Company has to prove the amount of money they actually lost as a result of what you said. As a practical matter, they usually cannot prove any hard losses as a direct result of whatever you said, so there are two tricks they use. One is called a “liquidated damages” clause, which means that if you say anything they don’t like, you have to pay them a specific amount of money; usually all of the money you received under any settlement. Second, the agreements usually make you pay their attorney’s fees for bringing the suit against you, which can be very expensive, aside from the fact that you will have to pay an attorney to defend yourself.

What Protections Are There Against This Under Existing Law?

i) NEGOTIATE – If you are asked to sign papers as a condition of receiving a severance payment, you should consult with an attorney if possible. If you have any right to sue the Company, a lawyer might have leverage to negotiate some aspects of these provisions. For example, you might be able to negotiate that truth will be a defense to any non-disparagement claim. You might be able to negotiate that the Company has to get a jury to actually decide that you violated the agreement before you owe them any money. You might be able to negotiate that the Company has to prove the violation by “clear and convincing evidence”, (more proof than in an ordinary case) which can protect you against false “he said-she said” accusations that you said something you didn’t actually say. The Company will always require you to pay their attorneys’ fees if they sue you under the agreement, but a lawyer can often negotiate a clause for you that says that whoever winsthe lawsuit will be able to collect their attorney’s fees from the losing party. At least this gives you some protection against the Company filing a baseless lawsuit against you, and your lawyer can recover your attorney’s fees from the Company if you win.

ii) LIQUIDATED DAMAGES MIGHT NOT BE ENFORCEABLE – If you get sued by the Company in New York for “liquidated damages” for breaking the confidentiality or NDA and the Company sues you to get the entire settlement amount back, don’t despair completely.There is a good chance that the New York courts will call this an illegal penalty clause and refuse to uphold it.[2] The larger the amount of money involved, the better your chances of winning with this argument. If you win on this ground, the Company will be limited to any actual losses it can prove happened as a direct result of what you said. If they cannot prove any actual damages, which they usually can’t, they will probably not be allowed to collect their attorneys’ fees either. The problem is that you will have to pay a lawyer to defend you, and there is no guarantee that this defense will succeed.

iii) LAW ENFORCEMENT – These agreements cannot legally stop you from reporting any illegal conduct to the appropriate law enforcement agency.

iv) FILING AN EEOC CHARGE – These agreements cannot stop you from filing a charge with the Equal Employment Opportunity Commission (EEOC), and possibly with other government agencies, but they usually will prevent you from being able to collect any money damages as a result of having filed such a charge.

v) IF YOU ARE SUBPOENAED TO TESTIFY – These agreements cannot stop you from giving truthful testimony if you are subpoenaed to testify in court or before any administrative agency by someone who suffered a similar violation by the Company. If you have signed an agreement like this and you are contacted by someone else who you would like to help in a different lawsuit against the same Company, just tell them to have their lawyer subpoena you, and the Company will not be able to sue you for testifying. You’re on solid ground with this.

vi) NON-PAYMENT OF WAGES – In cases for nonpayment of wages, confidentiality clauses are no longer permitted in the New York federal courts[3].

vii) WORKPLACE COMMUNICATION RIGHTS – The National Labor Relations Board (NLRB) held that Quicken Loans[4] could not enforce its non- disparagement clause because it violated the workers’ rights to criticize their employer and its products as part of their right to engage in protected activities, and employees sometimes do so in appealing to the public, or to their fellow employees, in order to gain their support. Be careful about relying on this one, though.

viii) I’M BROKE – SUE ME IF YOU WANT! If you don’t own any significant assets, and you are in a position where you could declare bankruptcy or anywhere near it, this gives you the freedom to disregard the agreement, say whatever you want, and let the Company sue. Normally, they will send a letter before they sue you, and if they do, you can just tell them “Go ahead – I’ll just file bankruptcy!”. If they believe you, they probably won’t sue, because it will just draw more attention to whatever they want to keep quiet; in fact, now that most courts have electronic filing, it will be putting the secrets they wanted to protect out on the internet for all the world to Google. Even if they sue and get a huge judgment against you, you can file bankruptcy for a few thousand dollars, along with whatever credit card debt you happen to have.

Is Anything About These Clauses Good for Employees?

Yes – i) Stay Off Google – If the case was not filed in any Court, the Employee wants to make sure that his/her claim against their Employer is not floating around in cyberspace where it can easily be googled the next time they apply for another job. ii) Neutral Reference – As part of a confidentiality clause, you might also negotiate what we call a “Neutral Reference”, i.e., if asked for a reference, the Company will provide the position held, dates of employment, salary, and say that it is their policy to provide this type of reference and nothing else. iii) The Shakedown Effect – In some cases the Company’s desire to keep certain information from getting out can motivate them to settle the case early on and for more money. If confidentiality agreements were illegal, this leverage would be lost. Management would call this legal extortion, and in some cases, that’s exactly what it is. This is another evil that would be corrected in a perfect world, but is very unlikely to be corrected in the world we actually live in.

How Did Dennis Rodman Make New Confidentiality Clause Law?

On January 15, 1997, while scrambling for the ball in a game against the Minnesota Timberwolves, Rodman fell into a group of photographers on the sidelines. When he got up, he did the only reasonable thing – he kicked one of them in groin. Without even suing, the photographer’s lawyers settled the case for $200,000, with Rodman’s attorney’s insisting upon, and getting, a strict confidentiality clause. Because personal injury settlements are not counted in taxable income[5], the photographer did not show the settlement on his taxes. The IRS came after him and the Tax Court[6] held that because the photographer’s injuries were really minimal and nowhere near worth $200,000, some of the settlement had to be assigned to the confidentiality clause, and taxes had to be paid on that part. Not only did the photographer lose out; Dennis Rodman obviously lost the benefit of his confidentiality clause, because the Tax Court opinion was widely reported after he paid so much money to keep it quiet. (Talk about getting kicked where it hurts!) After the “Dennis Rodman Case”, if you are getting a personal injury settlement with a confidentiality clause like this (most medical malpractice settlements require these), it’s a good idea to make the Confidentiality Clause run both ways, that is, to prevent the Company being sued from talking about the settlement also. Even though the Defendants never tell anybody about settlements anyway, if the IRS ever bothers you about it, you’ll have a good argument that the clause had a value to you, too. For example, if it becomes common knowledge that someone who lives in a Housing Project in the South Bronx is getting $250,000, that can become hazardous to his health. You can always tell your lawyer to have the agreement say that you didn’t want anyone to know that you were getting money just so people wouldn’t hear you were getting a settlement and ask you to borrow money, which is something that happens all the time. Sometimes, ignorance is bliss after all.

[1] Although there might be some protection under state law, depending on where you live.

[2] The New York courts have consistently held that “liquidated damage provisions will not be enforced if it is against public policy to do so and public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority”, see, Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., (N.Y. 1977); 555 W. John St., LLC v Westbury Jeep Chrysler Dodge, Inc., 149 A.D.3d 796, (2d Dep’t 2017); Clearview Farms LLC v Fannon, 145 A.D.3d 1556, (4th Dep’t 2016).

[4]Quicken Loans, Inc., Case No. 28-CA-75857 (Jan. 8, 2013). This comes from § 7 of the National Labor Relations Act, which guarantees workplace rights of association and to discuss the conditions of their employment with each other. However, as President Trump continues to appoint management oriented people to the NLRB, its decisions will give employees fewer rights.